MLPs Plunge Ahead of Fiscal Cliff on Tax, Valuation Concerns

By Michael Aneiro

Master-limited partnerships have had a rough week. Since the election, the Alerian Master Limited Partnership index (AMLP) as dropped 6%. The drop can be chalked up in part to fiscal cliff-related worries that MLP tax treatment could be changed, but the sector’s weakness also speaks to broader valuation concerns, Liam Denning writes in today’s Wall Street Journal:

Besides a general concern about scheduled increases in dividend and capital-gains taxes, with MLPs there is also the fear that politicians will remove their special tax treatment….

That vague fears of tax reform have hit MLP stocks speaks more to valuation. High-yield securities have been in demand amid ultralow interest rates, and the Alerian MLP index hit an all-time high last month. The difference between the dividend yield and 10-year Treasurys fell to 4.3 percentage points, below the five-year average. Other signs of excess, such as high acquisition multiples and a rash of new investor funds, have also appeared.

Denning says the sector was probably due a fall, and after this most recent correction MLPs are starting to look more attractive again.